Income and wealth

posted at 10:55 am on December 31, 2009 by King Banaian

After reading my post on wealth mobility and Dane Smith’s latest cri de coeurfor lost tax revenues, University of St. Thomas economist John Spry writes to Dane and me about a new paper by Gerald Auten and Geoffrey Gee on income mobility. (The paper in the National Tax Journal, but the first link above is to an ungated copy without the tables. You can find the tables here.) Auten and Gee have some presentation slides as well if you want a lighter skim.

The importance of the study, John writes, is that by use of IRS records Auten and Gee can track the same individuals over time:

By tracking the same people over time it can answers questions like: how has income changed for people that were in a particular income quintile in 1996 by 2005 (adjusting for inflation)? This is a different question than comparing people in a particular income quintile in 1996 with the set of people in the same income quintile in 2005. Some of the same people will be in the same income quintile, but some will move up or down.

John suggests you look at Table 4 (scrolling the table link), which is also the basis for most of the presentations slides. It is a little too hard for me to format, but this should do:

Percent Change in:

1996 Income Mean MedianQuintile Income Income

Lowest 186.8 77.2

Second 60.4 36.9

Middle 40.0 24.4

Fourth 31.7 17.9

Highest 25.8 8.6

Tap 10% 26.6 0.3

Top 5% 27.8 -10.6

Top 1% 10.1 -30.9

All Income Groups 37.1 22.7

Their main conclusions (quoting from the introduction):

There was considerable income mobility of individuals in the U.S. economy over the 1996-2005 period. More than half of taxpayers (57.5 percent by one measure and 55 percent by another measure) moved to a different income quintile over this period. About half (56 percent by one measure and 42 percent by another) of those in the bottom income quintile in 1996 moved to a higher income group by 2005.

Median incomes of taxpayers in the sample increased by 24 percent after adjusting for inflation. The real incomes of two-thirds of all taxpayers increased over this period. Furthermore, the median incomes of those initially in the lowest income groups increased more in percentage terms than the median incomes of those in the higher income groups. In contrast, the real median incomes of taxpayers who were in the highest income groups in 1996 declined by 2005.

The composition of the very top income groups changed dramatically over time. Less than half (39 percent or 42 percent depending on the measure) of those in the top 1 percent in 1996 were still in the top 1 percent in 2005. Less than one-fourth of the individuals in the top 1/100th percent in 1996 remained in that group in 2005.

The degree of relative income mobility among income groups over the 1996-2005 period was very similar to that over the prior decade (1987-1996). To the extent that increasing income inequality widened income gaps, this was offset by increased absolute income mobility so that relative income mobility neither increased nor decreased over the past 20 years.

Upward and downward mobility is affected by many factors. Based on a regression analysis, we find that initial position in the income distribution and changes in marital status are among the more important factors associated with changing positions in the income distribution.

I’ll add in my defense that wealth distribution and income distribution are different, and I took Dane’s challenge to be about the former. Still, the Auten and Gee study is quite important insofar as it uses individual tax return data to trace the path of a person in 1996 to where their income goes over a decade.

I found this fact quite interesting: For the top 1/100th of 1% of the income distribution — the 11,700 wealthiest tax filers in 1996 — their 1996 income was $11.6 million and their 2005 income was $4.1 million. Not suffering at all, but still a fall in median income of near 65%.

(P.S. I’ll continue posting on this topic for a few more weeks at my blog; please stop in.)

Update (Ed): I asked King to post this because I think it addresses a few myths about wealth, income mobility, and the nature of winners and losers in our economic system. We’ve heard plenty of populist complaining about the rich getting richer and the widening gap between rich and poor over the last several years. This puts that in the proper perspective.

This post was promoted from GreenRoom to HotAir.com.
To see the comments on the original post, look here.

Comments

the 11,700 wealthiest tax filers in 1996 — their 1996 income was $11.6 million and their 2005 income was $4.1 million.

One would imagine that a substantial portion of this group retired between 1996 and 2005.

The stats about mobility from lower income groups to higher are also interesting, but what percentage of those were simply kids in college or those who just graduated in 1996 and were working some job for beer money and to offset other schooling costs? This cuts both ways with regards to income and poverty stats. If you examine the number of people that the various federal agencies claim are living below the poverty line, you’ll see that a significant amount are in the 18-25 range, aka college kids. My wife (then girlfriend and later fiancee) and I worked through college, both pulling in ~$8-$10k a year, putting us right around the poverty line.

The problem is that this concept is too difficult for most liberals to comprehend. That sounds simplistic and just a snarky comment, but I am sincere. Most Americans (Republican AND Democrat) won’t try to understand economic tables and income charts. They can’t wrap their minds around anything more complicated than “Hope” and “Change We Can Believe In.”

Interesting points. The decrease in income for the top 1/100th of 1% might also be explained by one-time events. People with the top incomes may have benefited from the sale of a company or other asset. In following years, they’ll still be rich but not have a similar asset sale annually.

My wife (then girlfriend and later fiancee) and I worked through college, both pulling in ~$8-$10k a year, putting us right around the poverty line.

strictnein on December 31, 2009 at 11:16 AM

Yep. When I was in college my friends and I used to joke that for being poor (according to govt stats) we live pretty damn well.

Even the words poor or poverty are ridiculous in America. The poorest American is still richer than 75% of the planet. You want poverty? Go to India or China or Brazil. That is poverty. Only having basic cable instead of the premium package is not my definition of poor.

The super-rich take income when they need it, and they arrange their wealth to minimize the tax impact. That is an option not available to anybody but the super-rich. Oh, a high earner can try it by investing in municipal bonds, but that strategy barely keeps up with inflation and doesn’t work to build an estate that can become self-sustainable. It does work once the estate is self-sustainable, but to maintain a high-spending lifestyle, the estate has to be HUGE.

Equating income mobility and wealth mobility using income tax data is simply impossible. The wealthiest people are NOT the highest earners.

And they try to tell us that income re-distribution isn’nt happening and needs to be helped along. Looks like it’s alive and well. I do wonder though, how much of this actually is a result of our government policies?(read that interference)

I think you are correct to note that the data are not correlated to age, lifestyle choices, etc. So that data can only go so far. I think the point of the post remains intact, however.

In my experience as a small business lawyer, I see clients with wildly varrying incomes during their productive years, hopefully including at least one exit realization event which includes a big year which they are working for all their lives. A bunch of those successful clients that have an exit event (after building and selling a business) go back into the economy and make much lower incomes in the future (with a good bit in the piggy bank that does not throw off much income).

The economy is a dynamic amalgam that responds to all sorts of incentives. Many liberals (who have bureaucratic aspirations) are completely unaware of or otherwise ignore this dynamism. As VDH has stated, there is a war against the wannabe rich. The punish the rich policies inhibit upside potential for all sorts of aspirants.

It would be interesting to see annual incomes for individuals rather than a 10 year snapshot (Point A vs. Point B).

What is not shown is the source of “income”, whereby in the ’90s a lot of people made a fortune in the stock market as a result of the dot.com explosion. These same individuals most likely never hit another windfall, so their “income” in 2005 would be drastically lower.

An example would be a story from the late ’90s, where two kids (really….19-20 yrs old) started an internet access company and took it public. The total assets of the company consisted of about 4 servers and 10 phone lines (dial-up) in the basement of Mom’s House. As a result of the IPO, both owners took home about $10,000,000. Within weeks of the IPO, their “company” filed for bankruptcy and liquidated. My guess is both of these individuals are now pumping out fries at Burger King.

Well, the way the world economy and US economy is and Turkmenbama spending like 15 year old Paris Hilton with Mummy’s credit card, hardly ANYONE will be rich when he and the congress are done messing up this country.

If you have no idea who Gerald Celente and his Trends Research is, you ought to find out.

2010 is gonna be bad for almost everyone. And poor peeps DON’T hire and have the wampum to pay people!

Sorry, but you are wrong. You don’t have to be “super rich” to follow that strategy. You just have to have common sense and live within your means. I have a low seven figure nest egg and do very well with it.

Even the words poor or poverty are ridiculous in America. The poorest American is still richer than 75% of the planet. You want poverty? Go to India or China or Brazil. That is poverty. Only having basic cable instead of the premium package is not my definition of poor.

Shouldn’t this be one of those studies that reveal something so obvious you make fun of them in the headline?

The idea that people’s incomes grow over time is pretty un-earthshaking. The more intriguing question was, and remains, where incomes are when they start to plateau in middle age, and why they’ve been flat for the kind of middle class Americans the Republican’s pretend to like, and risen sharply for the rich Americans they actually do like.

I’d just like to point out that this myth was expertly pointed out by Dr. Thomas Sowell in his great book “Applied Economics” and I believe it was also covered his book “Economic Facts and Fallacies.” Read ’em all!

No, that idea is actually pretty earthshaking if the writings of your fellows are any indication.

Black Yoshi on December 31, 2009 at 1:11 PM

I don’t think anyone’s ever denied that income rises with the number of years in the workforce. Our problem has always been with the way the pie is cut up or whether, as they say, the rising tide is actually lifting all boats.

Most college students are not independent filers, but are still claimed by parents. My son makes probably what you did, but he is a dependent for us. I think that changes how he would be categorized for income.

Nah. The pie could be growing, but the slice allocated to one group grows as well to absorb all the growth, at the expense of the rest of the slices. Which, in fact, is what’s happening.

Given that I haven’t the time to pull anything of the web to back myself up, I’ll refrain from getting all aghast about how much faster incomes are growing at the top of the scale compared to the middle or the bottom, but they are indisputably growing at different rates, against the backdrop of a growing GDP, to the stats are certainly open to discussion.

strictnein on December 31, 2009 at 11:16 AM

Most college students are not independent filers, but are still claimed by parents. My son makes probably what you did, but he is a dependent for us. I think that changes how he would be categorized for income.

Jvette on December 31, 2009 at 1:47 PM

The growth in income needed to jump a quintile or two is not great at the lower level. (If you want to double-check me, always advisable, click on table H-1 here) For example, top level for the lowest quintile is about $21K. Anyone moving from a minimum wage job to something that pays about $11/hour is now officially mobile without having become anything close to affluent. And that’s not even taking onto account rising out-of-pocket health care costs.

I’m thinking that most college grads make the next jump — crossing the $40K hurdle into the middle quintile — within a year or two after graduation ( though I have no idea what college grads earn, I made more money as a waiter than at my first “real” job, though political hacks are notoriously poorly paid at the entry level). This probably also means that rookie cops, firemen, teachers and anyone in a job that might once have been union almost automatically show up as “mobile”, without earning a salary that I would consider particularly comfortable.

So, mobility between quintiles loses significance when the median income within quintiles remains relatively low. The idea is not just to move among quintiles, as people naturally do throughout their careers, but to, as an economy, raise real income by quintile across the board, so that when people’s incomes do plateau, they do so at a level that allows them a piece of “the American Dream.”.

I love how you spend all your time whinging about “pie slices”. Because you consume yourself with that it has never, ever occurred to you to get off your flabby, whinging arse and actually get a piece of the American dream. No, you hate all that’s good about America, so you just whinge, whinge, whinge. The Panty Bomber has more balls than you have!

Just look at the LEGAL immigrants whom come here and make THEIR American dream come true. They do it! If Americans can’t do it they ain’t working hard enough or like you (and most of the Turkmenbama Administration) or are hopeless losers! Now that your Messiah is at the helm, all of us will have less dollars in our wallets. You should be celebrating.

GET YOUR FAT STICKYBEAK OUT OF AMERICAN’S PRIVATE INCOME!! You’re pathetic and it shows and each and every one of your whinging posts. You just bloviate Liberal lies ad nausium…go get a job assisting un-repentant terrorist Bill Ayers. Maybe he’ll share some of his capitalistic dollars to you, toerag.

So, it seems you’re saying that there may be a ceiling on income for crack dealers and career welfare recipients?

If thats the case, do you think it wise to supplement their income through government subsidies or generous tax credits to close the income gap?

But I am confused: Should those with high incomes take a pay cut or just hand money over to those with low incomes, or, should those with low incomes take actions (like the actions taken by those with high incomes) to even out the income gap? Upon who is the onus to improve one’s lot in life?

But before answering those questions, please convince me that equal income is a right.

The pie could be growing, but the slice allocated to one group grows as well to absorb all the growth, at the expense of the rest of the slices. Which, in fact, is what’s happening.

You’re wrongly equating income to wealth. Much of the wealth that is maligned by yourself and the media work to perpetuate much of the funding that backs most of our jobs. Ya know the saying: “It takes money to make money.” You might not like it, but there’s a lot of truth there.

Do the research, low income folks rarely stay in the lowest income range. Places like McDonalds have over a 100% turnover rate of employment every year. It’s all about human capital and most people work to increase their human capital. The fact that some people DON’T, is neither the fault of the wealthy or high income earners, nor can it be fixed by some government intervention.

Even the words poor or poverty are ridiculous in America. The poorest American is still richer than 75% of the planet. You want poverty? Go to India or China or Brazil. That is poverty. Only having basic cable instead of the premium package is not my definition of poor.

angryed on December 31, 2009 at 11:25 AM

Great point AngryEd!

Gob on December 31, 2009 at 11:40 AM

If you want to see what real poverty looks like, go no further than this.

But before answering those questions, please convince me that equal income is a right.

BobMbx on December 31, 2009 at 2:34 PM

Equal income was never a right. It was also never right to enforce equal income. It kills innovation and incentive to work. For one, I think too much income inequality hurts, but total income equality will kill. You have no incentive to work harder… in fact you have no incentive to work period. No chance of promotion. No chance of improving your lot. Your choices are made for you by the state.

And the onus to improve I think belongs to those taking out the welfare checks and the govt subsidies. There’s a point where you go from lazy to ridiculous lazy.

They don’t pay you to do nothing in China. Heck, just read the link above… that’ll open your eyes.

The material world is an illusion. Stop worrying about who attracts wealth and who does not. Worrying over the riches of others blocks your ability to attract wealth (wealth in this sense is not just money) to yourself.

Stand on your own and envy no man nor his wealth. If you desire wealth of any kind, exert the mental and physical effort to acquire it. If you do not desire it, stay as you are.

Is it perfectly OK for you to be happy in either case, since no one and no thing can make you happy. Only you can decide to live in happiness. If you think sharing wealth is good, by all means share yours. It will come back to you many times over.

Life, liberty and the pursuit of happiness, remember? You were born with those inalienable rights, live up to their promise and your responsibility. Confiscating the labor of others does not up one’s standing, and any wealth so gained is fleeting, undeserved. Which means its acquisition only damages your karma. The universe is a system of perfect justice and cannot be cheated.

The universe will give you whatever you ask of it. It is a pity that so many like you ask so little. I was once quite poor in money and spirit. Changing that required changing myself. Looking to others for succor was a waste of time. I was lucky to learn this lesson fairly early.

Now I am somewhat wealthy in money, but more importantly I am very rich in friends, loving family, health and happiness.

I wish you well, but you must earn success and happiness. You can’t confiscate those achievements from another.

Amen, brother. I too was once a lazy, good for nothing, who blamed others for my state in life.

Then I got off my lazy butt, and worked. It took years, but I now have a home, a family, and self-respect.

I also have a fair trove of material things, but those amount to nothing. Leftists value material things they don’t have. They believe it’s okay to take them from people who earned them. As, once upon a time, did I.

Considering that much of the wealth and income is illusory, based on GDP growth that relied on pulled forward demand and serial bubble blowing, this should not be surprising. The bubble giveth, the bubble taketh away. I can’t wait to see the 2009 numbers as wealth destruction continues apace.

The short story here is that the confiscators remain unhappy, no matter how much they confiscate, while the earners and strivers remain happy, no matter how hard they have to strive. Congrats on your move to happiness!

Bottom line is, government policies are moving both ends of the spectrum to a single or a very narrow range of income.

Thus, the government can calculate and forecast tax revenues faster, enabling faster spending, eliminate loopholes for the higher income levels to hide their wealth.

However, such action eliminates initiative, innovation, and competition. Because, when you start working your salary is set and you will not receive any raises, but you can be sure you will be required to produce more for the same level of remuneration. But you will still get to elect those you want to control you.